How Red Tape stifles Entrepreneurship in South Africa

At the annual SAB Kickstart Awards in Mbombela in November last year, the Minister of Small Businesses, Lindiwe Zulu, said “Small businesses will do it,” and that government needs to create an “enabling environment” that will encourage entrepreneurship in the country.

Lindiwe had echoed very crucial words – that have been echoed by many South African public officials, including President Jacob Zuma.

Most of us do acknowledge the fact that to boost South Africa’s economy, and create more jobs, entrepreneurs need to be at the forefront of the nation’s productivity.

But, it seems, most public officials do not understand what it takes to boost business growth which will lead to higher productivity.

As Frans Cronje, the chief executive officer of the South African Institute of Race Relations, has argued before, while government does acknowledge the need to grow the economy and small businesses, most of its policies, though with good intentions, are not business-friendly and impede entrepreneurial and economic growth.

Pravin Gordhan’s treasury department projects less than 1% economic growth this year – and that is not good for a country that needs at least 5% annual growth in order to reduce the stunningly high levels of unemployment and poverty.

This projected growth number is disheartening; even more so, when you compare it to the entire sub-Saharan region – a region that has grown at an average rate of 5% over the past ten years.

Blessed with what most sub-Saharan countries do not have – infrastructure, strong democratic institutions, political stability and an efficient banking system – South Africa, sadly, fails in accelerating its economic growth to levels necessary for rapid job creation.

It is faster growth of small businesses, entrepreneurs that will revive this economy and create more jobs. But the challenges our entrepreneurs face are astonishing, and government’s policies are, in large part, to blame for the hardships they endure.

At the Youth Day celebration in Pretoria, last year, President Jacob Zuma encouraged the youth to start their businesses. He was right. The youth accounts for about 75% of South Africa’s unemployed – a serious crisis.

Many of these young people are from South Africa’s poor communities – where the legacy of apartheid is still felt. They don’t have skills and academic qualifications needed to find employment. And entrepreneurship is one of the areas where they can nurture their business skills and earn income.

Red tape stifling South Africa’s entrepreneurship

To understand the pain felt by South Africa’s entrepreneurs, you need only look at the recent 2015SBP SME Growth Index Report, published by Business Environment Specialists (SBP) – a South African independent private sector development and research company, specialising in improving the environment for doing business.

SBP surveyed 500 firms that employ less than 50 people. These are small growing firms whose mission is to produce, sell to customers, and expand. They operate in three sectors: manufacturing, business services and tourism. They were randomly selected, to ensure the survey broadly reflected the demographic profile of South Africa’s business owners.

After surveying these entrepreneurs, the report outlined the factors impeding growth of these firms; and the first major factor, was government’s burdensome regulations – which accounted for 40% of the factors stifling business growth. And, sadly, the amount of red tape has increased over the past two years.

These burdensome regulations have made it very hard for these firms to survive, expand and compete in the market.

The second factor that hurts business growth, according to the 500 surveyed firms, is lack of skills. Entrepreneurs can only grow if they can find the talent they need in order to increase their production. And South Africa is known for the shortage of skills in many critical areas. Entrepreneurs find themselves struggling to attract and find the skills they need to compete and grow in the market – a serious setback.

The moribund economy remains a problem for entrepreneurs as well. Because of the weak rand, slow economic growth, rising taxes, they feel the pain. Production costs have constrained the growth their businesses need.

Cost of labour, lack of finance, municipal costs and services, and increased competition – were the other factors that slow down business expansion. These costs resulted in cash flow problems for many businesses – which therefore meant they had to cut down on production and jobs.

Eskom’s failure to meet South Africa’s electricity demand has cost our economy billions of rands. Businesses grapple to maintain their operations due to occasional power cuts and the rising cost of electricity. That again impedes business growth and slows down job creation.

Other than the 2015 SBP SME Growth Index Report, you may also look at the bills proposed and passed by South Africa’s government over the past eight years to make sense of the hurdles faced by South Africa’s entrepreneurs.

From the Private Security Industry Regulation Amendment Bill, a bill requiring foreign-owned businesses to transfer 51% of ownership to South Africans; to The Property Valuation Act, a bill introduced to allow the state to value land and movable assets identified for expropriation at below-market prices; to Black Economic Empowerment (BEE) Amendment Act, a bill that threatens businesses with financial fines and jail terms should they not comply with it.

Businesses are negatively impacted by all these bills – due to the fact that they have to comply with them, at a cost. The business environment becomes uncertain and costly..

We also need to acknowledge the fact that laws favouring bargaining councils have repressed business growth in this country. They have caused huge damage, especially to small businesses.

Bargaining councils are usually made up of big companies, who, along with the powerful unions, sit in boardrooms and decide on the conditions of employment in their sector. The minister of labour, as obliged by section 32 (2) of the Labour Relations Act of 1995, must extend these agreements to non-parties. And many of these non-parties are small businesses who cannot afford these agreed-upon conditions of employment. As a result, their costs rise, have to shut down or downsize in order to survive.

The current labour laws have constrained business growth. As Temba Nolutshungu of the Free Market Foundation writes in his book, Jobs Jobs Jobs, “The onerous termination requirements, minimum conditions of employment, compulsory minimum wages and other regulatory conditions imposed on employers, all serve to consign thousands of people to the ranks of permanently unemployed”. It’s very difficult to disagree with that in a country with frightening levels of unemployment.

As a result of these labour laws, millions of South Africans are being denied employment opportunities. Businesses cannot hire and fire as they wish in fear that they will have to deal with organizations such as the Commission for Conciliation, Mediation and Arbitration (CCMA), and, possibly the Labour Court, at exorbitant costs.

What needs to be done to boost entrepreneurship?

It is clear that the only way to encourage business growth is for government to repeal many regulations that hurt businesses, and simplify the compliance requirements for small businesses. This, I believe is the way to boost South Africa’s entrepreneurship and speed up job creation.

What government needs to do in order to encourage entrepreneurship is to lift controls and allow businesses freedom to hire and fire as they wish. It is critical for government to lift these burdensome regulations; because as per the 2015 SBP SME Growth Index Report, regulations are a major hurdle to business growth.

Government has a big role to play in growing South Africa’s entrepreneurs. What it also needs to do is to ensure that the aspiring entrepreneurs have access to information. Aspiring entrepreneurs should be educated of the sources of funding. Entrepreneurship education would make a huge positive impact to the aspirations of entrepreneurs. Nation-wide walk-in centres to support entrepreneurs are a great idea.

The 2015 SBP SME Growth Index Report was unambiguous in its conclusion that government needs to make significant changes on policy. Because the key to getting job creation and business growth on track is reforming South Africa’s business environment. It is not only government that should spearhead this reformation; people should also commit themselves to making a positive difference.

When government implements its policies, it should consider the implications for businesses, especially small businesses. It’s disappointing to know that the burden of regulations has increased over the past two years.

The 2014 GEM Report also outlines a number of recommendations to encourage entrepreneurship in South Africa.

A stronger focus on entrepreneurship in schools is needed. This will help the youth to learn more on entrepreneurial skills and to take on the entrepreneurial opportunities that arise in their youth. But South Africa’s education system at the moment is disappointing and needs to be overhauled in order to achieve this.

The Independent Entrepreneurship Group (Ineng) recommends that a largely free-market system is an integral part of the development of small businesses. In order for government to grow these small businesses, it will need to cut back on burdensome regulations, reduce its size, reduce corruption and fight crime to accelerate business growth.

Liberalization of the market is a must. For example, the energy sector could be an opportunity for thousands of entrepreneurs, but due to government interventions and barriers to entry, aspiring entrepreneurs are denied the opportunity to participate in the energy industry. It’s not only the energy sector, there are many other industries as well, where government has intervened at the expense of business growth and job creation.

To eliminate the current high levels of unemployment and poverty, and become one of the competitive nations in the developing world, entrepreneurs ought to be the driver of our economic growth. The very global and competitive world necessitates that we invest heavily on entrepreneurship.

What South Africans should understand is that entrepreneurship begins with a vision and passion to get things done. Thousands of people have entrepreneurial ideas but have no knowledge on how to turn them into actual business concepts and start their businesses.

It is therefore crucial that government and the general public educate one another on the complexities of entrepreneurship. Because we need robust entrepreneurship to build a prosperous future. But that prosperous future is only possible, if government chooses pro-market, pro-business policies.